State's big tech companies hand victory to California

Last month, Massachusetts' biggest technology companies won a victory against Gov. Deval Patrick and the venture capital firms that back startups in the state when the Legislature declined to ban non-compete agreements.

These agreements prevent employees of state technology companies from leaving to work for a competitor — unless they are willing to sit on their hands after departing an employer for years.

Associated Industries of Massachusetts, the lobbyist for the victors, trumpeted its legislative success. As it wrote, "Lawmakers preserved the ability of employers to protect their intellectual property through the use of non-compete agreements; rejected a proposed version of the Uniform Trade Secrets Act that would have made defense of IP and trade secrets nearly impossible."

John Regan, AIM's executive vice president of government affairs, positioned the legislative victory as prudent. He said, "Beacon Hill has developed a pretty sophisticated understanding of the need to create a predictable economic climate for the employers who create jobs and prosperity in Massachusetts."

AIM touted its victory against "the Patrick administration and a small group of well-heeled venture capitalists (who) worked for more than a year to ban non-competes altogether."

AIM said its opponents "were arguing that (non-competes) inhibit the growth of new companies in the innovation economy. But the initiative created a backlash among the larger business community as hundreds of employers in sectors ranging from technology to manufacturing contacted members of the Legislature to underscore the importance of protecting the innovations that drive the Massachusetts economy."

AIM and its paymasters also won a resounding defeat in the state's battle against California for talent and startups. To be fair, for decades Silicon Valley has been a much more important location for startups than the Bay State. But plenty of successful companies got their start in Cambridge and reached economic fruition on the West Coast. Facebook and Microsoft, both founded by Harvard dropouts, repotted themselves out of state after they got started.

But with help from AIM and its paymasters, California remains a much better place in many respects for a startup. One of the reasons is that California does not enforce non-competes. That makes it much easier for someone to leave a big company and start a new one.

Big tech companies in California have solved the problem that seems to bother big tech companies here. Rather than suing former employees who leave to start new companies, companies like Google invest in them and reap the benefits of their effort, either by participating in the proceeds from selling those startups, or by acquiring them once they have perfected their new products.

The Massachusetts companies that are so eager to enforce those non-compete agreements view intellectual property as a zero sum game, meaning that a victory in the battle for control of IP for their opponents is a loss for them. California, on the other side, views it as a plus-sum game; namely, that letting a startup commercialize IP that may not target a market that interests the big company will make the pie bigger for everyone.

I remain confident that Massachusetts will not change its non-compete laws. The first reason is that the big technology companies get the best legislation that money can buy. Unlike venture capital firms and startups, large technology companies contribute to political action committees and have lobbyists who help out legislators in their bids for re-election.

EMC "fiercely guards its workforce against competitors" in Massachusetts, while aggressively recruiting workers from rivals in California, where noncompetes are banned, according to The Boston Globe. Now that EMC's side has prevailed, it will continue to enjoy the ability to exploit a law in California that it opposes in Massachusetts.

But a second reason why the state will not get rid of non-competes is that its proponents do not have an effective lobbying arm.

Xconomy wrote, "New England Venture Capital Association director C.A. Webb, was spending almost all of her time pressing for change to non-compete laws on Beacon Hill." But the effort failed. As Ms. Webb told Xconomy, "The interests of our citizens and our state's economic well-being must come before the protection of power that a few companies enjoy wielding. Our community of entrepreneurs and investors will continue to fight to ban non-competes in Massachusetts."

Regrettably, when I spoke with her in June, she was unable to provide a solid economic rationale for banning non-competes. What I was looking for is an economic analysis that counts the number of jobs and the amount of tax revenue that Massachusetts loses as a result of non-competes. She told me in a June 3 email, "It's something we have feelers out on, but no research I can share at this point, unfortunately."

Until such a study is available with credible assumptions — and the side that wants to kill non-competes can come up with more campaign cash for state legislators — non-competes will remain enforceable here.

I wonder whether EMC's short-term victory will prove to be a long-term loss for EMC's shareholders — who continue to suffer due to its slow revenue growth — and for the state.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.